On Jan. 15th I posted a reply with a paper by Dr. Werner in which he proved with an experiment that banks do create money when they make loans. It is also true that a week or 2 later this money can be used to meet the regulation requirement to have 90% of loans on deposit, but banks can borrow from the central bank or from another bank that has more of those deposits on the overnight market.
. . . This means that banks have no hard functional limit on how much they can loan, except that they need to find credit worthy borrowers. Also, even if a few banks are afraid to make loans there are always other banks that happen to have more deposits, and so they can feel better about making more loans.
So, in 2014 the Bank of England put out a report that said this. That his proof was definitive.
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Money creation in the modern economyBy Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1)
This article explains how the majority of money in the modern economy is created by commercial
banks making loans.
Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’
central bank money to create new loans and deposits.
The amount of money created in the economy ultimately depends on the monetary policy of the
central bank. In normal times, this is carried out by setting interest rates."
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https://www.bankofengland.co.uk/-/media ... rn-economy_______________________________________________._________________________
Five years later the BOE put out another report that seems to take most of this back.
"
Can banks create as much money as they like?No, they can’t.
Regulation limits how much money banks can create. For example, they have to hold a certain amount of financial resources, called capital, in case people default on their loans. These limits have become stricter since the financial crisis."
. . . [AFAIK, this is referring to the 90% requirement,]
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https://www.bankofengland.co.uk/explain ... ey-createdI think that the BoE took it back under pressure from mainstream econ. because the economists don't want to change their theory. They like it the way it is because it helps the rich get richer and they functionally work for the rich.
They like the part of their theory that Gov. deficits crowd out investment in businesses by sucking up the available savings. In the equations, savings and investment are assumed to be equal. But, if banks create money, then they can always make another loan, if the borrower is credit worthy.
Also, it can be shown that because the Gov. spends and later sells the bonds to equal the deficit spending, the Gov. provides the money to buy the bonds and the existing money is not touched at all. Gov. deficits add to incomes and to savings.
. . . So, Gov. deficits do not suck up existing savings and banks can always make another loan. In fact, deficits will add to the existing savings in the future in the form of bonds or cash if the central banks buy some of the bonds from the public as it often does.
So, the crowing out theory is false. Totally false. This part of MS theory is used to limit "excessive" deficit pending to help the mass of the people, by claiming that it reduces money saved that can be used by businesses as investments.
Also, their math would have to be redone because S does not equal I (savings= investment). This would have been a big problem because it made all the textbooks wrong.
So, they saved the theory with that 2nd report. But it is still wrong. However, many of you still believe it.
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